Clearly define roles and responsibilities when a third party handles investment management

The model is the same as when a management team acts upon a corporate board’s strategy. Clear guidelines are needed to reflect the significant decision making delegated to the investment manager.

The plan sponsor remains in control of high-level strategy, defining the pension plan’s long-term funding objectives and determining return requirements relative to the liabilities, while the delegated investment manager implements the daily aspects of that strategy, including portfolio construction and operations.

Figure 1 shows the range of investment decisions and activities, and which function they fall under.

Typical delegated manager functions

• Allocation to different asset classes, within the plan sponsor’s guidelines
• Monitoring the funding level and implementing changes based on market conditions and de-risking triggers
• Hiring and firing investment managers
• Negotiating investment manager fees
• Negotiating legal investment management and related agreements
• Executing documentation
• Managing cash flow
• Monitoring investments at a detailed and higher level
• Liaising with the custodian

We believe the appointment of a delegated investment manager can help increase governance effectiveness if there are up-front, clear guidelines based on the plan sponsor’s mission, objectives, and carefully defined roles and responsibilities.